Although results were in line, loans growth was a disappointment. TP reduced to RM2.70 but reiterate our OUTPERFORM call on account of attractive total returns.

In line. AFFIN 1Q18 results was in line with our/market expectations, accounting for 24%/27% of our/consensus estimates. No dividend declared as expected.

QoQ a disappointment on account of weak loans. Note that a year – on-year (YoY) comparison is less meaningful as the group did a reorganization in October 2017.

QoQ, results were disappointing with CNP falling by 16% to RM141m. Weak CNP is attributed to weak top-line falling by 11% dragged by fund and fee-based income of 4% and 23%, respectively. Fund-based income fell as loans were marginal (+1% QoQ) with NIM falling slightly 3bps to 1.98%. On annualized value, loans were abysmal at +1% a far cry from its target of 6-7%. Despite a marginal increase in opex (<+1%) CIR jumped ahead by 7ppts to 65% as opex outpaced revenue. Personnel costs took the bulk of the opex at 65%. Asset quality was stable at 2.5% mostly coming from mortgage and working capital. On a net basis, impaired loans were at 1.7%. However, there was a credit recovery of 14bps due to recovery of one account related to real estate. Inclusive of regulatory reserves, loan loss coverage is at 104% with little impact on MFRS9 with CET1 up by 90bps to 13.1%.

Moving forward, from updates by management, we view cautiously its revised loans target of +6% (from 6-7%) to be driven by consumer, corporate and SMEs. Management revised its target to +5%. Moving forward loans will be supported by consumer and SME post GE14. AFFIN is striving for a portfolio balance of consumer (40%), corporate (40%) and SME at 20% (FY17: 43% Corp, 49% Consumer and 8% SME), with contribution from Islamic financing portfolio to be enhanced to 40% in 2019 (2017: 34%). Contribution from Islamic financing has improved by 1ppt to 35%. To compensate for challenging growth, higher yields loans will be the target coming from consumer loans i.e. personal financing (PF) and HP. To minimise risks, corporate loans will be skewed towards Environmental, Social and Governance (which includes energy and education portfolio) financing while avoiding the real estate segment. We expect flattish NIMs ahead due portfolio rebalancing and higher yielding portfolios. Management maintained its credit charge guidance of 30-40bps.

Forecast earnings tweaked. We tweaked our FY18E earnings by 6% to RM552m on account of; (i) loans at <3% (previously 5%), (ii) credit charge at 35bps (vs 31bps previously), and (iii) flat NIMs (unchanged), and CIR at <58% (from~56%). Based on these assumptions; (i) loans at ~5 (from 6%) (ii) credit charge at 34bps (from 29bps), (iii) NIMs at +1bps (unchanged), and (iv) CIR at <58% (from ~56%), we slash our earnings by 8% to RM645m.

TP reduced and rating maintained. Our TP is now at RM2.70 (previously RM2.90) based on a blended FY19E PB/PE ratio of 0.5x/9.5x as we roll over our valuation to FY19. This PB/PE is based on their 5-year mean with a 1SD below on account of challenging loans, and upside bias on credit costs. Total returns are still attractive at ~13%; thus, we reiterate our OUTPERFROM call.

Risks to our call are: (i) higher-than-expected-margin squeeze, (ii) lower-than-expected loans/financing growth as well as (iii) worse-than- expected-deterioration in asset quality.

Source: Kenanga Research - 01 Jun 2018